Chapter 2 - McGill Faculty of Engineering MIME 310...

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McGill Faculty of Engineering MIME 310 Engineering Economy Chapter 2 – Principles of Accounting Accounting, the source of all financial information to the Outline business world Section 1: How businesses keep financial records • Basic Principles in Accounting • Financial Statements - Income Statement - Balance Sheet - Cash Flow Statement Section 2: How well is a business doing? • Analysis of Financial Statements Section 3: What is depreciation? • Definition and Basic Principles i t i M t h d 1 • Depreciation Methods
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Basic Principles in Accounting Accounting is the systematic recording of all of a business’ ansactions (for future reference) Basic Equivalences transactions (for future reference). First Shareholders’ Equity = Assets - Liabilities Assets Liabilities Goods owned by a business… g cash inventory real estate Items owed by a business… g accounts payable taxes payable e.g. cash, inventory, real estate, machinery and patents e.g. accounts payable, taxes payable, bank loans and mortgages hareholders’ Eq it Shareholders’ Equity Net worth of the business to its owners; consists of: - amount raised by issuing shares, “capital stock” 2 - past profits reinvested in the business, “accumulated retained earnings”
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Basic Principles in Accounting Basic Equivalences From the business’ point of view, equity is a liability as well, because: • Capital obtained by issuing shares belongs to the shareholders ccumulated retained earnings represent the business’ profits • Accumulated retained earnings represent the business’ profits that have been reinvested; these belong to the shareholders as ell well 3
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Basic Principles in Accounting Example of a Balance Sheet E N G I N E E R I N G S E R V I C E S L I M I T E D Balance Sheet 31 December, 2000 Current Assets Current Liabilities Cash 5 400 Account payable 35 200 ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Accounts receivable 9 000 Taxes payable 4 800 Inventory 37 600 Total 40 000 Total 52 000 Long-term Liabilities ixed Assets ong-term debt 2 000 Fixed Assets Long-term debt 22 000 Land 37 000 Total Liabilities 62 000 Plant and equipment 110 000 Less Acc. Depreciation 27 000 83 000 Shareholders' Equity Total 120 000 Capital stock 100 000 Retained earnings 26 000 Other Assets 16 000 Total 126 000 TOTAL ASSETS $188 000 TOTAL LIABILITIES & SHAR. EQUITY $188 000 4
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Basic Principles in Accounting Basic Equivalences Second Profits = Revenues - Operating Expenses evenues perating Expenses Revenues Generated from the sale of products and/or services, and Operating Expenses Expenses incurred in fabricating products and/or providing services income from other sources to appropriate markets Profits Net amount available for - distribution to shareholders as “ dividends” and/or investing in the business i e tained earnings - reinvesting in the business, i.e. retained earnings 5
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Chapter 2 - McGill Faculty of Engineering MIME 310...

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